Chapter 7 and the Means Test | BDR
To find out how the means test affects your Chapter 7 filing, call a Philadelphia bankruptcy lawyer.
The Means Test: A Closer Look
In October 2005, the oddly-named Bankruptcy Abuse Prevention and Consumer Protection Act went into effect. Lawmakers were concerned about rising bankruptcy filing rates. So, they passed BAPCPA to stop frivolous Chapter 7 filings.
Anyway, the strategy worked. The Chapter 7 filing rate immediately dropped drastically. The numbers stayed very low for the next fourteen-plus years. Then, coronavirus happened. Experts predict that personal bankruptcy filings will increase during the early 2020s, as relief packages expire and the true financial effects of the pandemic set in.
Therefore, many people who disregarded Chapter 7 before are taking a closer look at it now. BAPCPA set up a number of hurdles to overcome, and the means test is probably the biggest one. Regardless of how the numbers work out, a bankruptcy lawyer can give you debt relief options, including Chapter 7, that can give your family a fresh start.
Before we get to the means test, let’s briefly look at a Chapter 7 and why it might be a good option for you.
Essentially, Chapter 7 wipes out most unsecured debt, such as credit cards. That’s good news for many families. The average credit card balance is several thousand dollars, and the average interest rate is over 20 percent. So, you can make double or even triple payments every month, and the loan amount might not decrease at all. That’s very frustrating for most people.
Other unsecured debts, which are usually disagreeable, include medical bills and revolving credit accounts. Some unsecured obligations, like back taxes and student loans, are only dischargeable in some situations.
Determining Your Income
The means test is actually a two-part or three-part inquiry. Determining your household income is step one.
Although the means test uses annual income figures, only the last six months are relevant. The filing month doesn’t count. So, if you file in April 2020, the lookback period is October 2019 to March 2020. Multiply this figure by two to determine your annual income. More on that below.
Why is this important? Income often fluctuates month to month. For example, many people get end of year bonuses, spring or summer income tax refunds, and the list goes on. If these payments happen to fall in the lookback period, they count as income. If they fall outside the lookback period, they don’t count.
Wage-earners use their gross income. That’s the amount paid before taxes and all other deductions are taken out. Other sources of income include:
- Child support,
- Unemployment insurance payments,
- Spousal support,
- Gifts, and
- Business income.
The law excludes Social Security payments.
Median Income Comparison
Next, compare your income to the average monthly income. The amount varies according to location, household size, and date. For example, as of November 1, 2020, the median annual income in Pennsylvania for a family of four is $103,857.
If your annual income is below the median figure, you automatically qualify for Chapter 7. If you make more than the median figure, you might still qualify for Chapter 7. You simply have to go to the next step.
Regardless of your income, you qualify for other forms of debt relief, such as Chapter 13 bankruptcy and non-bankruptcy debt negotiation. Chapter 13 gives families up to five years to catch up on past-due bills. During non-bankruptcy debt negotiation, a Philadelphia bankruptcy lawyer often convinces creditors to lower the interest rate or grant other relief. The threat of filing bankruptcy still exists, and that threat gives a lawyer powerful negotiating leverage.
Determining Your Expenses?
We put a question mark here because, as mentioned, this step is usually unnecessary. But here it is anyway.
If you earn above the median, you might still be eligible to file Chapter 7. Your expenses must be so high that you cannot pay 25 percent of unsecured nonpriority obligations within five years.
As for everyday expenses, like food and clothing, the IRS national standards presumptively apply. A bankruptcy lawyer might be able to increase these amounts, if the trustee (person who oversees the bankruptcy for the judge) believes the increased amount is reasonable.
For example, the IRS allots $950 a month for food for a family of four. That’s roughly $60 per person per week. You may increase this amount if your actual food bill is higher and you aren’t eating takeout for every meal.
“Unsecured nonpriority obligations” are usually credit cards and medical bills. So, if your expenses are so high that you cannot retire a fourth of your credit card debt in sixty months, you qualify for Chapter 7, regardless of your income.
Contrary to popular myth, the means test did not make Chapter 7 a thing of the past. In fact, even if you do not qualify under the income portion, you may still be able to file Chapter 7. For a free consultation with a bankruptcy lawyer, contact Bankruptcy Done Right. Convenient payment plans are available.